Cash Flow Available for Debt Service (CFADS) in Project Finance: The Lifeblood of Infrastructure Assets

Cash Flow Available for Debt Service (CFADS) Definition: In Infrastructure and Project Finance, the CFADS equals EBITDA – Cash Taxes +/- Change in Working Capital – Maintenance CapEx. It represents the total amount of cash flow an asset could potentially use to pay interest on its Debt and repay Debt principal in the period, and it’s used in the Debt sizing and sculpting and equity returns calculations.

Cash Flow Available for Debt Service (CFADS) is perhaps the single most important metric in Project Finance, and it will come up in virtually all models in the sector – even if you’re analyzing more of a “normal company,” such as a publicly traded airport.

It is similar to Unlevered Free Cash Flow (UFCF) for a normal company, but it is not the same, as shown below:

One key difference is that, unlike UFCF, CFADS also reflects the tax deduction for the interest paid on Debt, while UFCF ignores this and assumes no tax benefit.

This means that CFADS can easily create circular references in models because the interest expense affects the taxes, the taxes affect the CFADS, and the CFADS affects the initial Debt balance.

Also, UFCF typically deducts both Growth and Maintenance CapEx (i.e., long-term capital spending required to grow the business and the long-term spending to maintain the business), but CFADS normally deducts only Maintenance CapEx.

This is because in Project Finance, major new additions and upgrades – such as an additional airport terminal – are typically funded with additional Debt and Equity, so they do not depend on the existing CFADS.

The Debt sizing and sculpting common in Project Finance are always linked to the future CFADS of the asset because revenue and expenses tend to be more predictable in this sector.

When calculating the returns to the equity investors, the Cash Flow to Equity is based on CFADS – Interest Expense – Debt Principal Repayments, so it is also very important there.

Files & Resources:

• Cash Flow Available for Debt Service (CFADS) in a Simple Solar Model (XL)
• Cash Flow Available for Debt Service (CFADS) – Presentation (PDF)

Video Table of Contents:

• 0:00: Introduction
• 0:29: The Short Version
• 3:45: Part 1: Basic CFADS Calculation
• 6:28: Part 2: More Advanced CFADS Features
• 9:05: Part 3: CFADS in Debt Sculpting/Sizing
• 10:30: Part 4: CFADS in the Equity Returns
• 12:27: Recap and Summary

How to Calculate the Cash Flow Available for Debt Service (CFADS): The Basics

The basic formula is:

EBITDA – Cash Taxes – +/- Change in Working Capital – Maintenance CapEx

EBITDA for most infrastructure assets equals Revenue minus the Cash Operating Expenses in the period.

Revenue is typically based on a Produced/Transported Volume and a Rate.

For example, for a solar plant governed by a power purchase agreement (PPA), Revenue might equal the Electricity Generation * PPA Rate:

Cash Expenses are typically based on either “Capacity” (total MW for energy or total miles/kilometers for transportation) or “Production” (tonnage shipped, lithium mined, electricity generated, etc.).

For a solar plant, the expenses are mostly fixed and depend on the project’s Capacity:

To calculate the Cash Taxes, you start with EBITDA, deduct the total Depreciation (on both the initial development/acquisition and the Maintenance CapEx), deduct the Net Interest Expense, and multiply by the Tax Rate:

Finally, items such as the Change in Working Capital and Maintenance CapEx are typically based on percentages of revenue or per-capacity metrics at fixed periods (e.g., replacing inverters on solar panels once every 10 years).

Together, these items give you the CFADS metric used in the Debt sizing and sculpting and the returns calculations.

More Advanced Features of Cash Flow Available for Debt Service (CFADS)

While the starting point for CFADS is usually EBITDA, many more items could appear between the two metrics.

A few examples include:

1. Reserve Contributions and Withdrawals – Reserves exist to “smooth out” the cash flows and prevent huge drops when there’s a major maintenance item, such as an inverter replacement for solar panels. The asset owner normally contributes a fixed amount each year and then withdraws it to cover these major expenditures.
2. Hedging Costs and Gains and Losses – “Hedging” is used in the oil & gas and mining sectors to lock in commodity prices based on futures contracts. Hedging hurts if commodity prices (e.g., oil, gas, or lithium) increase but helps if prices fall. These expenses and gains and losses also affect the cash flows.
3. Decommissioning CapEx – When an asset such as a mine, a solar plant, or an offshore wind farm reaches the end of its life, the owners must spend something to retire it, take it offline, and remove the structure. These cash outflows also affect the CFADS but are typically covered by the Reserves (see above).
4. More Revenue and Expense Categories – Many conventional energy assets, such as natural gas plants, earn revenue based on both their Capacity and Production; also, the rates could be linked to a PPA or based on current market demand, creating more upside and downside potential. You will also see many more expense categories, especially for assets such as airports that operate more like “normal companies.”
5. Net Operating Losses and Tax Depreciation – Some assets are highly seasonal and may lose money in “low seasons” (very common with offshore wind farms); when this happens, they accrue NOLs they can use to reduce their Taxable Income in the future, and this also affects the CFADS. Many assets also depreciate their CapEx more quickly for tax purposes in the early years.
6. Scenarios and Operational Problems – Finally, to properly assess the downside risk, you must consider cases where the asset needs unscheduled repairs/maintenance or must complete a partial shutdown. This is common for natural gas and nuclear plants, but it happens even with utility-scale solar and wind.

Here are a few examples of these items taken from our lithium mining development model:

To give you a sense of the scenarios, here’s an example of “what could go wrong” in a solar development model:

These possible Availability Decreases must also be reflected in the model and CFADS calculations since they affect the project’s risk and potential returns.

The equity analysis in infrastructure is closer to credit analysis in some ways because the upside is often capped by PPA rates, while the downside is substantial.

Therefore, any infrastructure model above a certain complexity level should include support for multiple scenarios, focusing on “downside cases” that demonstrate potential issues with the expenses and operations.

How to Use CFADS in Debt Sizing and Sculpting

We have covered Debt sizing and sculpting extensively in another tutorial, so please refer to that for all the details.

In short, in most Project Finance models, the “Allowed” Debt Service in the period equals the CFADS / Minimum Debt Service Coverage Ratio (DSCR).

So, if the CFADS is $150, and the Min DSCR is 1.5x, the Maximum Debt Service is $100.

If the initial Debt balance is $800 with a 10% interest rate, the Interest Expense is $80.

Therefore, the “sculpted” principal repayment in this period is $100 – $80 = $20. This will increase each year as the Cash Flow grows and the Interest Expense falls:

The hard part is the Debt Sizing – in other words, determining that this initial balance should be $800.

To do that, you can use a simple method with Goal Seek in Excel that sets the initial Debt balance such that it reaches $0 by the maturity year.

Or you can base the sizing on the Loan Life Coverage Ratio (LLCR), which equals the Present Value (PV) of All CFADS in Entire Debt Tenor / Initial Debt Balance.

Since you know the LLCR and can calculate the PV of all the CFADS, you can flip around the terms to solve for the initial Debt balance.

However, this creates a circular reference because of the relationship between interest and taxes, so you can use a simple VBA “copy/paste” macro to get around that.

How to Use CFADS in the Equity Returns Calculations

The Equity Returns in a Project Finance model are normally based on:

• Upfront Investor Equity for the Development or Acquisition: This is a negative number in the beginning and is linked to the project’s Capacity or an existing asset’s EBITDA or cash flows and remaining useful life.
• Cash Flows to Equity: These equal the Cash Flow Available for Debt Service – Interest Expense – Debt Principal Repayments. More advanced items, such as Cash Flow Sweeps and Cash Trap Funding and Releases, may also factor in.
• Terminal Value (???): The concept of “Terminal Value” is not always relevant in infrastructure because assets have fixed useful lives. A solar plant or offshore wind farm cannot operate “forever” because it eventually wears down and stops functioning economically. You may still see Terminal Value for certain types of assets, but only if you assume a holding period shorter than the full useful life.

The key point is that the CFADS is a key input into the returns calculations because it determines the Cash Flows to Equity.

Confusingly, these Cash Flows to Equity are not quite the same as the Levered Free Cash Flow, but they are quite close (the main difference is the slightly different treatment of new Debt issuances).

Just remember that the Cash Flow Available for Debt Service (CFADS) itself is quite different from both UFCF and LFCF – per the table at the top of this article.